Does the payment feel crushing? Does the interest rate suck? Just looking at these options, you begin to wonder if there is even a Plan B. So, can you get a business debt consolidation loan with bad credit? It’s true - you may be able to get a business loan even if your credit is poor. However, that comes with a special set of expectations and requirements - and there is even less wiggle room on any factor that affects your eligibility for the loan or the terms that will be applied. A business debt consolidation loan is when you take out a new loan and use the funds to pay off existing debts or loan obligations. Consolidating gives you a single payment to make.
When evaluating the possibility of a business debt consolidation loan, you may need to supply information about your company’s revenue and credit scores to the lender, as well as how long you have been operating your business. The requirements for getting approved for a business debt consolidation loan typically include having been in business for at least a year, a personal credit score of 670 or higher, and at least $50,000 in annual revenue. If you fall short of these benchmarks with a credit score below 670, you may face higher rates and fees. If you don’t meet these criteria, however, you may still be able to work with some of the online and alternative lenders that accept low credit scores. Credibly, for example, is known for a low credit score requirement. Before approving a loan, the lender wants to know that you can afford to make the new payment on your loan. That’s why they will want to review your revenue or cash flow.
Business debt consolidation often comes with an origination fee, which can range from 0.05% to 10% of the loan amount. If you have low or bad credit, you may see higher fees associated with business debt consolidation. It’s important that you know exactly what you are going to pay when you get a business loan, so take the time to compare the APR (interest rate + origination fee) of various lenders, not just the interest rate. Be sure to read through the loan agreement to understand any prepayment penalties, late fees, and monthly administration fees that may apply.
Consolidating business debt doesn’t change your total amount of debt - you just owe the new debt to another creditor. Keep in mind that even though you have fewer debts to manage, if you pay off the debt over a longer period of time, you will likely have a higher total cost of debt. Compare your current monthly payments and terms. How will the new loans’ payment and terms stack up to what you’ve been doing? Do you truly get a better deal? Check how much interest you’ll pay on the new loans. Will it really be less than what you pay now? Estimate the total payments over the life of the new loans. Will it be less than the payments you would continue to make on the old loans if you had never consolidated? Most business debt consolidation loans will require a personal guarantee. That makes you personally responsible for the debt if the business can’t pay it.
- Step 1: Assess how much you’ll need to take out for the new loan. First, add up how much you’d need to pay off to settle every debt you want to consolidate. That’s how much you need to take out in a new loan. Do the math here and make sure the new payment is lower than what you pay now. If not, it may not be worth it.
- Step 2: Review your business and personal credit. Just like when you apply for a normal business loan, your credit is a determining factor in which lenders will accept you and at what APR. If you have bad credit, you may still qualify for debt consolidation loans.
- Step 3: Confirm that debt consolidation is acceptable. Some lenders won’t allow you to use the loan to pay off another debt, so that’s a question to ask your lender.
- Step 4: Gather documents and be ready to sign. Like any business financing, you’ll need to provide documentation like bank statements, tax returns, and financial statements. You’ll also likely be required to put up a personal guarantee.
Prequalify. Go to the lender’s website and answer some questions about yourself and your business. From there, you can compare offers before filling out the full application. Let’s say you have a Merchant Cash Advance or short-term loan that’s paid back daily or weekly. With a debt consolidation loan, you could lower your APR as well as your payment, allowing you to keep more cash flow in your business.
Bad business credit got you turned down for a debt consolidation loan? First, double-check your revenue figures, time in business, total debt owed, and credit information to see if there are any errors that could be the reason you were turned down. Then ask the lender what specifically caused your application to be declined. You may need to increase revenue, pay down debt, find a co-signer or wait longer for more operating history to qualify.
Secure a Loan Through Another Source
If you don’t qualify for a business debt consolidation loan, or the only loan you get is more expensive than the debt you’re carrying, you might be able to secure a loan through another source. Some lenders offer personal loans for business expenses. A personal loan won’t take your business revenue or time in business into account, so it could be a good option if you’re a newer business. Home equity loans and home equity lines of credit (HELOCs) are another option. To qualify for a home equity loan, you have to have at least 20% equity in your home. If you’re able to qualify for one, a home equity loan may offer a lower rate than a business loan or credit card. However, if you fall behind on your payments, you could lose your home. There is also the “rollover for business startups” (ROBS). A ROBS allows you to take funds from your retirement account without incurring the typical penalty, provided you operate as a C corporation. Typically, at least $50,000 should be in your retirement account before you attempt a ROBS. Be sure to work with a qualified professional if you decide to proceed with a ROBS. Failure to comply with certain requirements can lead to heavy fines.
Remember that debt consolidation only makes sense if you can lower your interest rate or stretch your loan out into a longer term that will improve your cash flow. In other words, if you get a consolidation loan with a higher APR, or a much longer repayment term, the overall cost of the debt may be significantly higher. If you are a newer business, or you don’t have strong personal credit scores, you will likely have to turn to an online lender or alternative lender to secure a business loan. If you have good credit, a traditional bank or SBA lender can offer you the best interest rates. Please note that bad credit does not automatically exclude you from business debt consolidation loans. However, it is important to run the numbers and make sure that it makes sense for your business.
